Using endowment policy as a low risk investment vehicle
an endowment policy provides both cover and investment opportunities.
Investing in stocks is an approach used by many to build wealth. By buying shares investors become part owners of the company they choose to invest their money in. But to make a substantial amount of money investors have to take risks. Thus, the higher the risk the higher the return!
It goes without saying however, that not all investors are high risk tolerant. Some prefer low risk investments that are safe and stress free. A low risk investments doesn’t return as much as would a high risk one, but at least by the end of the day there’s perceptible return. Slow but steady!
For low risk investors, an endowment policy would be complementary to a low risk stock portfolio.
What is an endowment policy?
An endowment policy is simply life insurance combined with an investment and saving plan. The policy holder pays premium for a specific period and on maturity, he/she is paid a certain amount (sum assured) plus bonuses.
It is sometimes referred to as participating or with profit policy. In the event of a policy holder’s death, beneficiaries are paid the money. An endowment policy can therefore be viewed as a protection and wealth creation plan.
How does an endowment policy work?
An endowment policy works like a regular insurance policy only difference is that it offers investment opportunities.
- Policy holder pays premium strictly for a given duration of time (10, 15 20 years).
- Insurer provides cover (life insurance).
- Insurance company invests the money in their portfolio.
- Each year the company pays reversionary bonuses as a guaranteed set percentage of the basic sum assured.
- On maturity, the policy holder is paid the sum assured plus accrued bonuses depending on the profits of the portfolio.
What are the benefits of endowment policies?
- Two for the price of one.
Endowment policies offer protection and investment opportunities to the policy holders. - Low risk.
The policy holder does not need to worry about volatility and is guaranteed cash back on maturity of the policy. - Nurtures financial discipline.
Endowments are very strict when it comes to premiums and life of the policy. - Loved ones are financially protected.
In case anything happens to the policy holder, beneficiaries get paid instead. It is prudent to have family or children as beneficiaries. - Tax benefits.
Proceeds are tax free when the policy matures but subject to terms and conditions. - Loan security or collateral.
A policy holder can use the policy as security for a loan. In the event that the borrower is unable to pay, the lender can cash in the policy.
Conclusion
Low risk investors can benefit a lot from endowment policies. On maturity the money can be used to pay for college and therefore guarantee a bright future for your children. An endowment policy should however not be used as an alternative investment vehicle to stock markets. They work side by side.
